Internet Advertising Trends
November 3, 2008
ad:tech – New York
mary.meeker@ms.com / david.joseph@ms.com
www.morganstanley.com/institutional/techresearch
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Internet Advertising Discussion Thoughts
• Difficult near-term outlook
1) Economic slowdown with decades of build up
2) Ad spending highly correlated with GDP Growth
3) Rapid inventory growth + CPM pressure
4) Monetization tools under-developed for high growth video / social networking
/ VoIP / mobile Internet
• Good news
1) Internet usage growth remains strong
2) Search share gains remain relatively robust
3) Performance-based advertising seeing success
• Net
1) There’s bad news, there’s good news…
2

Specific Proposed Questions
• M&A - Active or Dormant?
• VC Investments: Continue or Dry Up?
• Online Ad Spending - Up or Down?
• Search vs. Display Trends?
• Will Online Ad ‘Flight to Quality’ to Top 10 Sites Continue?
• Ad Networks - Consolidation or Fragmentation?
• Recession - Opportunity for New Media?
3

Difficult Near-Term Outlook
1) Economic slowdown with decades of build up –
impact? 1 year? 5 years?
4

Roots of Economic Challenge?
10+ Years of Rising Home Ownership + Declining Interest / Savings Rates
U.S. Homeownership Rates vs. Interest Rates vs. Personal Savings Rates, 1965-2008
70% June 2004: US home ownership = 73MM
20%
68%
16%
U.S. Interest Rate & Personal Savings Rate
U.S. Home Ownership Rate
66% January 1993: HUD began promoting
broader home ownership. US home
ownership = 62MM
12%
64%
8%
62%
4%
60%
58% 0%
65
67
69
71
73
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
U.S. Home Ownership Rate
U.S. Interest Rate U.S. Home Ownership Rate 30-year (1965-1995) Trendline
U.S. Personal Savings Rate
Note: HUD is Department of Housing & Urban Development.
Interest rate is the overnight federal funds rate.
5
Source: Federal Reserve, DOC Bureau of Economic Analysis (BEA), Morgan Stanley Research.

10 Years of Rising Home Prices – Up ~2x
U.S. Real Home Price & Building Cost Indexes, % Change 1965 - 2007
90%
80%
70%
60%
% Change From 1965 Level
50%
40%
30%
20%
10%
0%
-10%
1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
U.S. Real Home Price Index U.S. Real Building Cost Index
Note: Real home prices & building costs are adjusted for inflation; Source: Robert Shiller. 6

USA Total Debt = Up ~2x Over 30 Years to 3x GDP
Foreign Ownership Ramped to ~60% US Treasuries – Helped Pace ‘Easy Money’ + Leverage
300% 70%
Foreign Ownership of U.S. Treasuries, % of
275% 60%
250%
U.S. Total Debt, % of GDP
50%
Total Market Cap
225%
40%
200%
30%
175%
20%
150%
125% 10%
100% 0%
1965 1970 1975 1980 1985 1990 1995 2000 2005
U.S. Total Debt, % of GDP
Foreign Ownership of US Treasuries, % of Total Market Capitalization
Source: Bridgewater, total debt include both public and private debt, US government debt = ~65% GDP, Morgan Stanley Research 7

-0.3% Q/Q US GDP Growth in CQ3 / Consumer Spending Fell 3.1%
Biggest Q/Q Decline Since 1980 – October < September < August < July
U.S. Real GDP vs. Real Personal Consumption Expenditures (PCE)
Q/Q % Change, 2005-2008
6%
5%
4%
3%
Q/Q Growth Rates
2%
1%
0%
CQ1:05 CQ3:05 CQ1:06 CQ3:06 CQ1:07 CQ3:07 CQ1:08 CQ3:08
-1%
-2%
-3%
U.S. Real GDP Q/Q Growth U.S. Real PCE Q/Q Growth
Note, Real GDP and real PCE are inflation-adjusted, Real PCE is seasonally adjusted.
CQ3:08 data is “advanced,” may differ from final reported #s. 8
Source: BEA, Morgan Stanley Research.

Stock Market = Leading Indicator of Economic Growth
China off 71% vs. 12-Month Peak, Russia -67% / Japan -50% / Oil -53% / S&P500 -36%
600 2006 2007 2008
500
Indexed Value (base = 100)
400
300
200
100
0
10/05 1/06 4/06 7/06 10/06 1/07 4/07 7/07 10/07 1/08 4/08 7/08 10/08
S&P 500 NASDAQ Composite Index
China Shanghai SE Composite India SENSEX
Russia RTS Light Crude Oil - Continuous Contract
Gold - Continuous Contract Japan Nikkei 225
Note: all indices start at a value of 100 on 10/31/05; data as of 10/31/08; Source: FactSet 9

Difficult Near-Term Outlook
2) Ad spending tied to GDP growth
10

Advertising Spending & GDP Growth =
High Correlation of 81%
U.S. Advertising Spending Y/Y Growth vs. Real GDP Y/Y Growth, 1986 – 2007
20%
15%
U.S. Ad Spend vs. GDP, Y/Y Growth
10%
Median Y/Y Ad Spend
Growth Rate = 5%
5%
0%
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
-5%
1991 Ad Growth = -2% 2001 Ad Growth = -12%
-10%
U.S. Real GDP Y/Y Growth U.S. Ad Spend Y/Y Growth
Source: Zenith Optimedia, IMF, Morgan Stanley Research. 11

Simple Regression Analysis:
1) Ad spend growth 3x sensitivity of real GDP growth
2) If GDP flat (current MS forecast), ad spend could decline ~4% Y/Y
U.S. Advertising Spending vs. Real GDP y = 3.0263x – 0.0394
20% 1986 – 2007 R2 = 0.6553
y – ad spend growth
x – real GDP growth
15%
Ad Spend Y/Y Growth
If real GDP Ad spend
Y/Y growth Y/Y growth
10% is… could be…
5% 11%
4 8
5%
3 5
2 2
1 -1
0%
0 -4
-1% 0% 1% 2% 3% 4% 5% -1 -7
-2 -10
-5% -3 -13
Real GDP Y/Y Growth
-4 -16
-5 -19
-10%
U.S. Ad Spend vs. Real GDP Y/Y Growth
Linear Regression Line (y = 3.0263x - 0.0394 R^2 = 0.6553)
Note: R2 of 0.655 indicates that correlation is not perfect (n=22), and correlation does not equal causation.
Source: Zenith Optimedia, IMF, Morgan Stanley Research. 12

…Difficult Near-Term Outlook…
2) Rapid inventory growth + CPM pressure
13

Portals Continue To Lose Relative Traffic to
Video / Social Networks
• Yahoo! + MSN = 5% of global minutes in 9/08 vs. 11% in 6/06
• YouTube + Facebook = 5% in 9/08 vs. 0% in 6/06
Global Minute Share
7%
6%
% Share of Global Minutes
5%
4%
3%
2%
1%
0%
6/06 9/06 12/06 3/07 6/07 9/07 12/07 3/08 6/08 9/08
Yahoo.com Msn.com YouTube.com
Facebook.com Google.com
Source: ComScore Global 9/08, Morgan Stanley Research. 14

Supply > Demand –
Ad Impressions Growing Rapidly…CPMs Declining
U.S. Banner Ad Impressions & CPM, U.S. Rich Media Impressions & CPM,
2005-2007 2005-2007
1,000,000 $3.50 35,000 $40
900,000 $35
$3.00 30,000
800,000
$30
700,000 $2.50 25,000
Impressions (MM)
Impressions (MM)
$25
600,000 20,000
$2.00
CPM
CPM
500,000 $20
$1.50 15,000
400,000 $15
300,000 $1.00 10,000
$10
200,000
$0.50 5,000 $5
100,000
0 $0.00 0 $0
05
05
06
06
07
07
05
05
06
06
07
07
3/
9/
3/
9/
3/
9/
3/
9/
3/
9/
3/
9/
Banner Ads Impressions Banner Ads CPM Rich Media Impressions Rich Media CPM
Source: Internet Advertising Bureau (IAB), Nielsen NetRatings, Morgan Stanley Research. 15

CPMs –
Search vs. Banner vs. Rich Media
$40 2005-2008E
CAGR
$34
$31
Search vs. Display Effective CPM
$30 8%
$30 $28
$25
$26 $22
$20 $18
-19%
$10
$3 $2 $2 $1
-19%
$0
2005 2006 2007 2008E
Search Banner Ads Rich Media
Note: (1) Search effectiveness here measured by dividing the total search advertising revenue by total search ads impressions (000);
(2) Banner Ad / Rich Media CPM calculated as total banner / rich media advertising revenue divided by total impressions (000).
These metrics are not directly comparable to “Ad Revenue per 1,000 Page Views” data presented in slide 21, since many pages do not
have ads (thus pvs >> impressions). Source: Morgan Stanley Research
16

…Difficult Near-Term Outlook
3) Monetization tools under-developed for high-growth
video / social networking / VoIP / mobile Internet
17

Video + Social Networking + VoIP + Payments –
Undermonetization Creates Arbitrage / Innovation Opportunity
Users Y/Y Growth Comments
#3 site in global minutes; 5B views of online
video in the US (Americans watched a total of
12.6B videos / 591MM hours online in 9/08);
329MM(1) +52% #2 global search engine – search queries on
YouTube reached 9.2B in 8/08 (+123% Y/Y),
surpassing Yahoo! sites with 8.5B searches
(+2% Y/Y).(1,2,3,6)
#5 site in global minutes; 120MM+ active
users; 50%+ users outside of college; 24K+
161MM(1) +119%
applications + 95% of Facebook members
have used at least one(1,4)
If ‘carrier’ then #2 behind China Mobile; $1.55
annualized revenue per registered user (-3%
370MM(5) +51%
Y/Y); 2.2B Skype Out minutes (+54% Y/Y);
16.0B Skype-to-Skype minutes (+63% Y/Y)(5)
$15B total payment volume (TPV), +28% Y/Y,
higher than eBay’s global gross merchandise
65MM(5) +19%
volume; Off-eBay payment volume +49% Y/Y
to 51% of TPV(5)
Source: (1) comScore global 9/08; (2) comScore Video Metrix 8/08; (3) YouTube; (4) Facebook;
(5) eBay CQ3, (6) comScore qSearch, 8/08. Morgan Stanley Research. 18

Good News…
1) Internet usage growth remains strong
19

Broadband + Mobile + Internet Users =
Especially High Global Growth
2002 Y/Y 2007 Y/Y Global 2007 Net
Category Growth Rate Growth Rate Market Size Additions
Broadband Subscribers 78% 23% 349MM 64MM
Mobile Subscribers 20 20 3,319MM 563MM
(1)
Internet Users 26 16 1,352MM 182MM
(2)
Financial Cards 12 11 8,016MM 804MM
Installed PCs 12 8 900MM 66MM
Cable / Satellite TV Subscriptions 8 6 761MM 40MM
GDP per Capita 2 3 22K 1K
Population 2 1 6,501MM 77MM
Telephone Lines 5 -0 1,277MM -4MM
(1) Include mobile Internet users, based on ITU’s compilation of country reports, surveys and estimates;
(2) Includes credit / debit / ATM / charge cards in circulation; Source: Morgan Stanley Research
20

# of Internet Users –
Top 10 Emerging Markets > Top 10 Developed Markets in 2008
Top 10 Emerging Markets vs. Top 10 Developed Markets – Internet Users
700 80%
600 70%
60%
Internet Users (MM)
500
Y/Y Growth
50%
400
40%
300
30%
200
20%
100 10%
0 0%
2001 2002 2003 2004 2005 2006 2007 2008E
Top 10 Emerging Markets Top 10 Developed Markets
Top 10 EM Y/Y Growth Top 10 DM Y/Y Growth
Note: Emerging / developed markets as defined by IMF; Top 10 chosen based on largest GDP.
Top 10 emerging markets: China, India, Russia, Brazil, Mexico, Turkey, Indonesia, Iran, Poland, and Saudi Arabia;
Top 10 developed markets: U.S., Japan, Germany, U.K., France, Italy, Spain, Canada, South Korea, and Australia;
Source: IMF, ITU, Morgan Stanley Research. 21

Internet User Growth Especially High Outside USA –
China / Brazil / Pakistan / Columbia / India / Iran / Russia
2007
Net Added 2007
Internet Users 2007 Penetration
Rank Country (000's) Growth Growth
1 China 73,000 53% 5%
2 United States 9,800 5 3
3 Brazil 7,400 17 4
4 Pakistan 5,500 46 3
5 Colombia 5,395 80 11
6 India 5,000 7 0
7 Iran 5,000 28 7
8 Russia 4,311 17 3
9 Germany 3,900 10 5
10 France 3,553 12 6
11 Vietnam 3,188 22 3
12 Canada 3,000 12 8
13 Egypt 2,620 44 3
14 Indonesia 2,424 23 1
15 United Kingdom 2,400 6 4
16 Mexico 2,248 11 2
17 Thailand 2,003 18 3
18 Nigeria 2,000 25 1
19 Poland 1,915 14 5
20 Venezuela 1,580 38 5
Note: Penetration is per person. Source: ITU, Morgan Stanley Research 22

…Good News…
2) Search share gains remain relatively robust – at
margin, e-commerce + search should gain share in
difficult economy – efficiency greases skids for
consumers to find what they are looking for
23

Search –
Increasingly Valuable Customer Acquisition Tool
% of New Online Customers for Online Retailers / Marketing Spend Mix
40%
% Customers acquired from source
35%
30%
30% 27%
20% 18%
13%
11%
9%
10% 7% 6% 7% 6%
5% 4% 4% 3% 4% 4%
2% 2% 2% 1% 1% 1%
N/A N/A N/A
0%
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2006 2007
Source: The State of Retailing Online 2007 / 2008 (Forrester Research), comScore global 7/08, Morgan Stanley Research 24

Amazon.com’s Recommendation Engine =
Web’s Most Search Engine + Advertiser?
Amazon.com search + recommendation engine:
Leveraging data
New formats:
Kindle
What Amazon
recommends
What other
customers
are buying
What other
customers are
thinking
What other
customers
are saying
Source: Amazon.com, Google 25

Amazon.com’s High Customer Satisfaction =
E-Commerce Share Gains + Impressive Metrics
Amazon.com vs. US Retail Amazon.com
45% (1)
E-Commerce Sales Key Operating Metrics
40%
CQ4:07 CQ1:08 CQ2:08 CQ3:08
35%
Revenue $5,673 $4,135 $4,063 $4,264
30% Y/Y Growth 42% 37% 41% 31%
Y/Y Growth
25% Active Customers 76 79 82 85
~27ppts
20% Y/Y Growth 19% 19% 18% 17%
TTM Revenue per
$195 $202 $210 $215
15% Active Customer
Y/Y Growth 17% 17% 19% 18%
10%
Total Units 241 196 190 203
5%
Y/Y Growth 33% 31% 32% 30%
0% (All metrics in MMs, except for TTM Revenue per Active Customer)
CQ2:02 CQ2:03 CQ2:04 CQ2:05 CQ2:06 CQ2:07 CQ2:08
US Adjusted Retail E-Commerce Sales
Amazon.com North America Revenue
US Total Retail Sales
(1) Adjusted for eBay by adding eBay US gross merchandise volume and subtracting eBay US transaction revenue;
Source: Amazon.com (CQ2:08), US Dept. of Commerce (CQ2:08), Morgan Stanley Research 26

Search =
Dramatic Share Gains of Online Ad Spending
U.S. Internet Advertising Mix
100%
14% 7%
12%
U.S. Internet Ad Spend % Mix
80% 15%
10%
9%
60% 20%
40% 47%
52%
20%
15%
0%
2002 2003 2004 2005 2006 2007
Search Advertising Banner Ads Rich Media
Classified Advertising E-mail and Other
Source: IAB, search spending adjusted by our estimates, Morgan Stanley Research 27

Search =
Still Lots of Share to Grab
U.S. Internet Search Spending
vs.
Ad Spending on Classified, Yellow Pages & Newspaper, 2000-2007
$80,000
$69,923 $70,348
$68,402
$70,000 $67,115
$65,146
$63,265
$61,224 $60,890
$60,000
Ad Spend ($MM)
$50,000
$40,000
$30,000
$20,000
$12,282
$9,430
$10,000 $6,910
$4,113
$889 $2,133
$122 $299
$0
2000 2001 2002 2003 2004 2005 2006 2007
Internet Search Combined Classified, Yellow Pages & Newspaper
Source: IAB, search spending adjusted by our estimates;
Classified, Yellow Pages & Newspaper spending per MS Media team.
Morgan Stanley Research. 28

Search =
CPC Trend - Up / Down / Sideways?
Google Cost Per Click, 2005 - 2008
$0.60
$0.53 $0.54 $0.53
$0.51
$0.50 $0.48 $0.49
$0.46
$0.44 $0.43 $0.44 $0.44 $0.45
$0.42
$0.40 $0.41
$0.40
$0.30
$0.20
$0.10
$0.00
1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08
Search Cost Per Click
Source: Google, Morgan Stanley Research 29

…Good News…
3) Performance-based advertising
seeing success – measurability more
important in difficult times
30

Performance-Based Advertising Gaining Share
+20% Y/Y in CH1:08 vs. +12% for CPM-Based Revenue
60% U.S. Internet Ad Revenue Share by Pricing Model, 2000 - 2007
51%
47%
% Share of Total Revenue
45% 41% 41%
37%
30%
21%
15% 12%
10%
0%
2000 2001 2002 2003 2004 2005 2006 2007
Performance CPM Hybrid
Search Revenue Share
Note: Performance based advertising includes search, lead-generation, among others; Hybrid pricing model includes
a mix of impression-based pricing plus cost-per-click, sale, lead / straight revenue share;
Source: IAB, Morgan Stanley Research 31

Net
1) There’s bad news, there’s good news…
32

Bad News =
From 2000 to 2002, U.S. Online Ad Spending Fell 27%
$25,000 U.S. Online Advertising Spending & Y/Y Growth Rates, 1996-2007 250%
$21,206
200%
$20,000
U.S. Online Ad Spending ($MM)
$16,879
150%
Y/Y Growth Rate
$15,000
$12,542
100%
$10,000 $9,475
$8,225
$7,134 $7,267 50%
$6,009
$4,621
$5,000
0%
$1,921
$907
$267
$0 -50%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
U.S. Internet Ad Spending Y/Y Growth Rate
Source: IAB, Morgan Stanley Research. 33

Good News = Unlike 1999-2000, Less ‘Over Spending’ Vs. Trend Line
However, Q/Q Pattern Looks A Bit Like Early 2001
U.S. Online Advertising Spending & Y/Y Growth Rates, CQ1:96-CQ2:08
$6,000 300%
U.S. Online Spending & Search Revenue ($MM)
250%
$5,000
Total U.S. Online Spend Y/Y Growth
200%
$4,000
150%
$3,000
100%
$2,000
50%
$1,000
0%
$0 -50%
3/96 3/97 3/98 3/99 3/00 3/01 3/02 3/03 3/04 3/05 3/06 3/07 3/08
U.S. Online Ad Spending Spending on Search
Y/Y Growth Online Ad Spend Polynomial Trendline
Source: IAB, Morgan Stanley Research. 34

Good News = Largest USA Advertisers Under Spend on Internet
Only 5 of ‘Top 20’ Spenders Spent >= 8-12%(1) Industry Average
2007 2007
Total Ad Internet Ad Internet
(2)
Rank Company Industry Spending ($MM) Spending ($MM) % of Total
1 Procter & Gamble Consumer $5,230 $81 2%
2 AT&T Telecom 3,207 136 6
3 Verizon Telecom 3,016 189 9
4 General Motors Automotive 3,010 212 10
5 Time Warner Media 2,962 98 6
6 Ford Automotive 2,525 164 10
7 GlaxoSmithKline Healthcare 2,457 29 2
8 Johnson & Johnson Consumer 2,409 49 3
9 Walt Disney Media 2,293 141 10
10 Unilever Consumer 2,246 47 5
11 Sprint Nextel Telecom 1,903 71 5
12 General Electric Conglomerate 1,791 79 7
13 Toyota Automotive 1,758 57 5
14 Chrysler Automotive 1,739 53 5
15 Sony Technology 1,737 72 7
16 L'Oreal Consumer 1,632 12 2
17 Sears Retail 1,628 23 3
18 Kraft Foods Consumer 1,508 36 3
19 Bank of America Financial 1,491 72 18
20 Nissan Automotive 1,423 34 4
Note: (1) 8% is the average of the top 100 US ad spenders in 2007, per Ad Age. Data via TNS, which excludes search revenue. We
use IAB and ZenithOptimedia data to estimate that in the U.S., online ad spend (including search) = ~12% of total ad spend;
(2) Percentage of total measured advertising spending, which is smaller than the total ad spending figures provided. 35
Source: Advertising Age, “100 Leading National Advertisers” 6/08; Morgan Stanley Research

US Internet Ad Spend
$288 Per Home vs. $818 for Newspapers Implies Upside
2007 Advertising Ad Spending /
Medium Spending ($B) Households (MM) Household ($)
Direct Telephone $110 107 $1,032
Promotions 116 115 1,011
Newspapers 46 56 818
Classifieds 15 56 260
Direct Mail 61 114 532
Broadcast TV 44 112 390
Cable TV 27 80 327
Internet / Online 21 71 288
Radio 20 113 172
Yellow Pages 16 114 141
Outdoor 7 114 63
Total $469 $4,774
Average 47 477
Newspapers include Classifieds. Promotions ($116B) include: incentives ($30B), promotional products ($27B), point-of-
purchase ($19B), specialty printing ($9B), coupons ($7B), premiums ($7B), promotional licensing ($7B), promotional
fulfillment ($6B), product sampling ($2B), and in-store marketing ($2B). Households may use multiple advertising mediums.
Source: PricewaterhouseCoopers, IAB, Jupiter Research, McCann-Erickson, Morgan Stanley Research 36

Best News =
History Proves That Ads Follow Eyeballs, It Just Takes Time
1996 – Morgan Stanley Global Estimates in ‘The Internet Advertising Report’ 2007 – We’re @
Internet Users:
1.35B(1)
Online Ad
Revenue:
$41B(2)
Ad Revenue
per User:
$30(3)
Note: (1) ITU, Morgan Stanley Research estimate, comScore reports a lower number for global unique visitors due to their sampling method;
(2) ZenithOptimedia; (3) Using comScore’s #s, global online ad revenue per unique user would have been ~$53;
Source: ITU, ZenithOptimedia, Morgan Stanley Research. 37

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